Inequality and debt in a model with heterogeneous agents

- We build a heterogeneous-agent DSGE model to discuss the impact of changing cross-sectional income differentials.
- We aim at clarifying the sources of increasing indebtedness in bottom income-quantile US households.
- Differential productivity growth across agents results in much smaller debt divergence than tax reallocation.
- Anticipated increases in income growth differential are inconsistent with the cross-sectional US debt dynamics.
- Economies with substantial income-consumption divergence require low cost of access to financial markets.

We show that to account for the cross-sectional divergence in debt-to-income ratios in US data a DSGE model must assume a tax reallocation across the top- and bottom-income quantile of the population, rather than differential productivity growth, and low cost of access to financial intermediation.